Seeking Alpha: Should Investors Go With The Flow?

If you follow the earnings reports of machine tool companies like Hurco (HURC), Hardinge (HDNG), and Gildemeister, these are not happy-fun-times in the machine tool industry, though there seems to be a big difference between companies that address high-volume and low-volume markets (the smaller the target company, the worse things appear to be). Likewise, companies with big exposure to metal-cutting, including Kennametal (KMT), Atlas Copco (ATLKY.PK), and MSC Industrial (MSM), have been reporting pretty challenging market conditions in North America and Europe.

As Flow International (FLOW) sells metal-cutting machine tools, you can probably guess where this is going. While Flow is a leader in waterjet cutting equipment, a business that seems under-penetrated, weak capex demand in the U.S. has made it difficult for this company to make real headway. I do believe there may be a worthwhile opportunity in these shares, but investors considering them are going to need patience (and maybe a buyout) to see this story work out.

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Should Investors Go With The Flow?

Seeking Alpha: Hurco Disappoints Amidst A Murky Machine Tools Market

There's an old NFL Films clip of Vince Lombardi fuming along the sidelines and yelling out "What the 's goin' on out here?" That encapsulates my feelings about the machine tool market and Hurco's (HURC) place within it. Hurco's limited focus on short-run, high-spec systems reduces the comparability to larger firms like Gildemeister, Mori Seiki (MRSKY.PK), Okuma (OKUMF.PK), and Makino Milling (MKMLF.PK), but it's still frustrating to see the company fail to make progress with its revenue, margins, and order flow.

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Hurco Disappoints Amidst A Murky Machine Tools Market

Seeking Alpha: Hurco Virtually Unknown And Meaningfully Undervalued

Typically when a writer talks about a company being "under-followed" it means that there are no analysts from big name firms following the stock, or that what coverage there is from small retail-oriented shops. In the case of Hurco (HURC), though, there is no coverage.

None.

While this is indeed a small company with a very small float, it doesn't deserve to be completely ignored. Hurco is a small player in the global machine tool industry, but its high-spec tools address a legitimate market opportunity. What's more, the company's margins and returns on capital stack up quite well against some of the giants of the sector. While there is a frustrating cyclicality to this industry, Hurco shares look 30% to 50% undervalued on the basis of a long-term free cash flow model.

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Hurco Virtually Unknown And Meaningfully Undervalued

Seeking Alpha: Hurco Navigating A Tough Market Reasonably Well

As a tiny industrial company focused around capital equipment and generating more than half of its revenue from Europe, it shouldn't surprise anyone that Hurco (HURC) is seeing some challenging operating conditions. That said, the company is managing this tough market reasonably well and while the next couple of quarters are likely to be touch-and-go, the long-term potential of this company ought to make it a solid candidate for small-cap investors.

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Hurco Navigating A Tough Market Reasonably Well